How Much Is Enough When One Obligation Never Quite Ends
Mark, 41, is a plant manager earning $120,000; Elena, 39, earns $35,000 part-time as a dental hygienist. Their sons are 9 and 5. Obligations: a $340,000 mortgage with 26 years remaining, $120,000 per child for college, and $1,500 a month they send to Elena's mother, which they intend to continue for her expected 15 remaining years. Ongoing family spending, excluding those three items, is $70,000 a year and would continue for 20 years if Mark died. Resources: $95,000 of savings (they insist on keeping $40,000 liquid), $210,000 in retirement accounts, a $250,000 term policy on Mark with 12 years left, and employer group term equal to one times salary that ends at termination or retirement. Elena has no coverage and would cut back to part-time for at least 12 years. Assume a real discount rate of 3%: the 20-year annuity factor is 14.88 and the 15-year factor is 11.94.
1. Estimate the capital need if Mark died today. Show the components and state which resources you would deliberately not net against the total, and why.
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Capital needs
| Item | Calculation | Amount |
|---|---|---|
| Ongoing spending | $70,000 x 14.88 | $1,041,600 |
| Mortgage | payoff, not payment stream | $340,000 |
| College | 2 x $120,000 (already in today's dollars) | $240,000 |
| Support for Elena's mother | $18,000 x 11.94 | $214,920 |
| Total | $1,836,520 |
Note the consistency trap: the income stream is discounted at a real rate, while the college figure is already stated in today's dollars. Discounting the college number again would understate the need by roughly a third.
Resources actually available: savings above the reserve ($95,000 - $40,000 = $55,000) plus existing coverage ($250,000 term + $120,000 group = $370,000) = $425,000. Gap: about $1,411,520.
Do not net:
- Retirement accounts. They fund Elena at 65; spending them at 40 creates ordinary income and destroys decades of compounding.
- Elena's earnings. She is reducing to part-time, her income is not guaranteed, and the need was defined as the spending gap. If you do net it, net only after-tax earnings for the years she actually works, and add child-care cost.
- Group term as if it were permanent. It vanishes at retirement, so it cannot fund any need that survives Mark's employment.
- Social Security survivor benefits until confirmed. Verify the family maximum; if benefits are real, net them only in the years payable, then re-level.
This is an estimate, not a precision instrument. Round up and disclose the assumptions.
2. Elena argues that 20 years of coverage is plenty because the boys will be grown. Identify the needs that outlive a 20-year term and explain how the recommendation should change.
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Three exposures survive the 20-year window:
- The mortgage tail. 26 years remain; a 20-year policy leaves six years of payments with no dedicated funding. Solve it with payoff-at-death language rather than a payment stream, and match the term to 26 years (or 30).
- Elena's retirement. The 20-year income stream stops when she is 59. She will have spent 12 or more years at reduced hours, so her own retirement funding is the casualty. This is the item families consistently forget.
- Longevity risk on the mother's support. Fifteen years is an expectation, not a contract; a 20-year stream with 15 years of expected payments has little margin.
Recommendation: layer, don't layer on duration by default. A defensible structure is roughly $1.1 million of 20-year term for the income and college needs, plus $500,000 to $700,000 of 30-year level term (or a blend with a small permanent base) for the mortgage tail and Elena's retirement gap. Adding a modest permanent policy is justified less by Mark's need than by Elena's: she is uninsured today and, at 39, her own insurability is the asset most likely to deteriorate.
A single 30-year policy on the full $1.5 million is simpler and defensible, but it costs more in the years when cash flow is tightest; if premium budget binds, shorten the education layer, never the income layer.
3. Mark's group certificate appears to cost him nothing. How should it be treated in the plan, and what should happen when he leaves or retires?
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Treat it as a buffer, not a foundation. Group term is annual-renewable, experience-rated, and priced to the employer's group, not to Mark; employer-paid coverage above $50,000 produces imputed income to him under IRC section 79. It terminates at separation or retirement, and the only exit ramp is a conversion privilege, typically exercisable for about 31 days and usually at attained-age permanent rates.
Concretely: exclude the $120,000 group amount from any need that extends past age 65, and do not let its presence reduce the individually owned coverage. Here it is legitimately counted only against the 20-year income need, because Mark is expected to be employed for that period.
At separation or retirement: confirm the conversion window in writing before the last day of employment, price both conversion and a new individually underwritten policy, and buy while health is still good. Mark is 41; by retirement he may not be insurable. The practical rule is to own personally the coverage that must be there when the employer relationship ends, and to treat the group plan as a cost-free supplement while it lasts.